Two investment options with long-term earning potential

Saving for retirement is a daunting task, and it is more difficult than ever in today’s economic environment.

Decreasing Social Security benefits and increasing out-of-pocket medical expenses are contributing to a new and uncertain retirement landscape. As baby boomers take strides to retire comfortably and on time, they are looking for ways to pad their portfolios with long-term earning potential.

For preretirees building wealth and planning for the future, dividend-paying stocks and annuities are two investment vehicles that are slated to deliver long-term results.

Dividend-paying stocks: In search of yield

Even as the recession maintains its slow pace, investors still desire return on investment but are hesitant to expose their portfolios to the market’s volatile nature. Dividend-paying stocks are a means of participating in the market with the added incentive of consistent income streams.

Dividend-paying stocks provide a level of wealth-building potential regardless of market performance. As the market is posting gains and investors are seeing returns from increasing prices per share, dividends boost an individual investor’s overall account value. Or, when the market is underperforming, they still provide returns to an investor, which could potentially be used to counteract price depreciation.

For example, an investor could take advantage of the unique opportunity to use returns to purchase additional shares of the company’s stock but at a lower rate, which ultimately allows the investors to collect more shares. One of the most attractive aspects of dividend-paying stocks that becomes especially important as the markets remain volatile are that regular distributions provided by dividends can help fund current expenses or be reinvested to create a compound rate of increase.

Because of the added income incentive that the dividend provides, dividend-paying stocks are even more valuable to an income-generating portfolio and can help in planning for monetary demands at various points of retirement. Historically, dividend-paying stocks are not as volatile as other stocks and, because of the added benefit of a potential dividend return, the investor is better protected from the downside. This is even more important in a declining market.

Hybrid annuities: The ‘supercharge’ strategy

In addition to dividend-paying stocks, there are other options available to investors that promote long-term gains. When an investor comes to me and asks how they can participate in the markets while limiting their exposure to risk, I explain the “supercharge strategy,” which is hinged upon incorporating hybrid annuities into an investor’s portfolio.

Annuities help focus a portfolio on preservation, rather than accumulation. There are several annuity products available to investors, including fixed, variable and hybrid, and it is very important to select the right type for your individual savings needs. Hybrid annuities are an alternative for investors who want to participate in the markets but also seek safety on their principal, and, as a result, the investment option acts more like a pension plan investment.

The highlight of hybrid annuities is that investors have the safety and security of principal as well as the ability to gain interest based on the performance of the market, most likely a percentage of overall gains. In general, hybrid annuities preserve principal as long as they are held to maturity. Additionally, they offer interest credited toward the account and interest locked into the account. Therefore, the investor keeps whatever interest they’ve gained.

Let’s look at an example of how hybrid annuities work in an investor’s portfolio: Let’s say that the market returned 20 percent this year. As a result, the hybrid annuity holder will receive a portion of the market return as interest credited toward their account.

Now, let’s say that the following year the market produced a negative return and is down 20 percent. An investor holding a hybrid annuity would not have any return, but they also didn’t experience the downside risk. Throughout the two years, the market ended up breaking even, but the hybrid annuity holder was able to hold on to their portion of the market return in the form of credited interest.

Though each individual investor’s savings goals differ, it is a universal investment objective to obtain the highest and most consistent returns. As retirement draws nearer, aspiring retirees are increasingly focused on making smart investment moves that will maintain income throughout retirement, and dividend-paying stocks and hybrid annuities are two of the many starting points for income-generating options.

Chris Hobart is founder and CEO of Hobart Financial Group in Charlotte.